Chongqing Zongshen Power MachineryLtd (SZSE:001696) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Chongqing Zongshen Power MachineryLtd (SZSE:001696) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Chongqing Zongshen Power MachineryLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.07 = CN¥566m ÷ (CN¥11b - CN¥3.4b) (Based on the trailing twelve months to September 2024).

Thus, Chongqing Zongshen Power MachineryLtd has an ROCE of 7.0%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

Check out our latest analysis for Chongqing Zongshen Power MachineryLtd

Above you can see how the current ROCE for Chongqing Zongshen Power MachineryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chongqing Zongshen Power MachineryLtd .

So How Is Chongqing Zongshen Power MachineryLtd's ROCE Trending?

When we looked at the ROCE trend at Chongqing Zongshen Power MachineryLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.0% from 9.0% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

While returns have fallen for Chongqing Zongshen Power MachineryLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 423% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Chongqing Zongshen Power MachineryLtd, we've spotted 2 warning signs, and 1 of them is potentially serious.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.